financial-due-diligence

Financial Due Diligence Skill

Produces a structured financial due diligence framework — document request list and analytical questions — for any investment, acquisition, or significant commercial relationship.

Required Inputs

• Transaction type (acquisition / investment / partnership / supplier / fundraise)
• Stage of diligence (initial screening / full DD / confirmatory)
• Target company type (startup / SME / listed / subsidiary)
• Key concerns (optional — e.g. revenue recognition, customer concentration)

Output Structure

1. Document Request List

Financial Statements

• Audited accounts for last 3 years
• Management accounts for current year (monthly)
• Board-approved budget and latest reforecast
• 3-year financial model with assumptions

Revenue

• Revenue by customer (top 20, % of total)
• Revenue by product/segment
• Contracted vs recurring vs one-off breakdown
• Churn and renewal data

Costs

• Cost of sales breakdown
• Headcount by department with compensation detail
• Top 10 supplier contracts

Cash and Debt

• Bank statements (12 months)
• Debt schedule with covenants and maturity
• Working capital analysis

Tax

• Last 3 years tax returns
• Any open enquiries
• R&D tax credit claims

2. Key Analytical Questions

Revenue quality: Is revenue growing organically? What % is truly recurring? Customer concentration risk?

Margin analysis: Gross margin trend over 3 years? One-off items inflating EBITDA? Normalised EBITDA?

Cash conversion: Does profit convert to cash? Cash conversion cycle? Working capital red flags?

Debt and liabilities: Net debt position? Contingent liabilities? Covenant headroom?

3. Red Flags Checklist

• Revenue concentration over 30% in one customer
• Declining gross margins without explanation
• EBITDA-to-cash conversion below 70%
• Auditor qualifications or emphasis of matter
• Related party transactions not at arm length
• Aggressive revenue recognition
• Growing debtor days with no explanation

4. Summary Output Template

• Revenue quality: [Assessment]
• Margin sustainability: [Assessment]
• Cash generation: [Assessment]
• Balance sheet risk: [Assessment]
• Overall: Green Strong / Amber Acceptable / Red Material concerns

Quality Checks

• [ ] Document request list is tailored to the transaction type and stage — not a generic template
• [ ] Red flags checklist covers revenue quality, margins, cash conversion, and balance sheet risk
• [ ] Every analytical question connects to a specific risk the transaction presents
• [ ] Summary output template is completed with an overall RAG assessment
• [ ] Disclaimer that this is a framework and does not substitute for qualified financial or legal advice

Anti-Patterns

• [ ] Do not present the checklist without tailoring it to the specific transaction type and stage of diligence
• [ ] Do not overlook revenue concentration risk — customer concentration above 20–30% is a material risk that must be flagged
• [ ] Do not confuse EBITDA with cash — always check cash conversion and identify non-cash items
• [ ] Do not skip the related-party transaction review — undisclosed related-party dealings are a common due diligence failure point
• [ ] Do not produce output without noting this is a framework and qualified financial and legal advice is required

Example Trigger Phrases

• "Give me a financial due diligence checklist for [company type]"
• "What documents should I request for financial DD?"
• "Build a DD framework for our Series A investment"